Investor Relations | IR Events | Performance Briefing

[ 1st Quarter of fiscal 2011 Performance Briefing ]Q&A

Q1. Within capacitors, what share of sales is accounted for by ceramic capacitors? How do you see sales of these products growing from the second quarter? Also, please provide a little more detail concerning improvement to the profitability of ceramic capacitors in the first quarter.
A1. Ceramic capacitors accounted for approximately 65% of capacitor sales. Regarding the improvement in the profitability of ceramic capacitors, we achieved profitability slightly ahead of plan in the first quarter.
Q2. How do you see orders trending for ceramic capacitors in the second quarter and thereafter?
A2. Orders were higher than expected in the first quarter and are about the same as the first quarter at present in the second quarter. We project orders to rise around 4% to 5% in the third quarter. For the fourth quarter, orders are likely to be less than the third quarter, as is always the case.
Q3. What would profitability be like if sales are largely unchanged in the second quarter?
A3. One concern is the appreciating yen. We are assuming an exchange rate of 87 yen to US$1. We hope to generate about the same earnings in the second quarter as the first quarter.
Q4. What share of sales do HDD heads account for in the recording devices category? Also, please give us shipments on a unit basis using the index you always use.
A4. HDD heads account for approximately 90% of sales in the recording devices category. On an indexed basis, assuming the first quarter of the year ended March 2010 was 100, sales in the first quarter of the year ending March 2011 were 122. We forecast this to rise to 126 in the second quarter and then to more than 150 in the third quarter.
Q5. I have two broad questions. First, TDK moved back into the black in ceramic capacitors in the first quarter. You said that you attributed this return to profitability to process improvements and the in-house production of materials. Please explain how you improved your processes. And by how much do you plan to raise the ratio of in-house production of materials by the end of the current fiscal year? I'd also like some guidance on how you see these measures improving earnings from the second quarter onward.

Second, please give us first-quarter net sales and operating income for EPCOS only, as well as a figure for EPCOS goodwill. I'd also like to know the forecasts for EPCOS for the second and subsequent quarters.
A5. Regarding process improvements in ceramic capacitors, I am not at liberty to give you details, but we have made improvements in various areas including materials. Looking ahead, we aim to make further improvements in the productivity of main products. I'm also unable to comment on the in-house production ratio of materials. We continue to make improvements and expect considerable benefits to show through next fiscal year and the year after that.

Regarding EPCOS' first-quarter performance, due to the change in segment classifications and integration of the businesses of EPCOS and TDK along with this, products have been allocated to the various product categories in the passive component segment. It is now therefore more difficult than in the past to clearly separate EPCOS and TDK sales. That will also be the case going forward. Even including EPCOS goodwill in the first quarter, we were still sufficiently profitable. EPCOS goodwill of approximately \1.2 billion was recorded separately.
Q6. Regarding capacitor orders, could you give us an indication how the situation has changed between the April earnings presentation, when you said you couldn't produce enough to keep up with demand, and now?
A6. As of late, orders for delivery in August have softened a little. However, this is largely in line with our expectations considering the Obon holiday period in Japan in August. It is difficult at this time to say whether orders from September onward will be strong like they were in the first quarter.
Q7. Using the former product sectors and segment classifications, what segment do you expect to contribute the most to higher earnings between the first and second quarters? Conversely, are there any segments you expect to drag down earnings from quarter to quarter? Please discuss structural reform expenses in this context as well. With these expenses included, do you expect earnings to rise or fall in the second quarter?

I also have a second question, which concerns HDD heads. Earlier you gave HDD head volumes, but what market assumptions have you made and what share are you forecasting for TDK? And what is your forecast for recording device sales?
A7. Looking at trends for the TDK Group as a whole between the first and second quarters, first, we are assuming that volumes will be largely the same or slightly higher. But because we are also assuming an exchange rate of 87 yen to US$1, our earnings might be about the same or we might post negative growth by the amount of change between our exchange rate assumption and the actual rate. Structural reform expenses were \0.2 billion in the first quarter and we are forecasting a figure of several hundreds of million yen for the second quarter.

Let me report our HDD head sales. Our sales in the first quarter were \71.7 billion, and we are projecting first-half sales of \140.0 billion. Our forecasts for the second half and full year are \153.4 billion and \293.4 billion, respectively. We estimate HDD demand of 674 million units. We are gearing up to raise our market share to 35% in the third and fourth quarters, as we mentioned at the previous earnings conference presentation. We expect the average number of heads per HDD to be approximately 3 from the second quarter onward.
Q8. I'd like to confirm the overall situation. Looking at volume forecasts for the second quarter, are there any segments with high expected growth rates or negative expected growth rates? Earlier you suggested sales might be largely flat. What are your forecasts for each segment?
A8. First- and second-quarter sales should be roughly the same in the Recording devices sector. The passive components segment as a whole should mirror this trend.
Q9. When will you incur large structural reform expenses this fiscal year?
A9. We don't expect to incur large expenses in the first half, and we expect to incur in the second half.
Q10. So there is no change to your full-year forecast of around \5.0 billion then?
A10. That's right.
Q11. I have a couple of questions. Comparing the first quarter with the fourth quarter of the previous fiscal year, operating income improved by about \12.0 billion. What segments and main products contributed and by how much to this improvement?

My second question concerns HDD heads. There was a sudden change in June, but how have conditions been for July and August. Have things improved on a monthly basis? Or is the market still soft but you have expectations for an upturn? Please comment on underlying market conditions.
A11. Passive components registered an improvement in earnings of about \8.0 billion from the fourth quarter. The magnetic application products segment accounted for the other approximate \4.0 billion improvement.

With HDD heads, as you know, volumes dropped considerably in June due to inventory adjustments. Volumes improved moderately in July and that upturn looks set to climb robustly in August.
Q12. Are you quite certain about your forecasts? There is some divergence in the guidance being offered by HDD manufacturers, but overall they aren't that bullish. Do you therefore really expect the rebound to continue in August?
A12. Yes.
Q13. How has ceramic capacitor production actually trended in the first and second quarters of fiscal 2011? What are your production plans for fiscal 2011 as new capacity comes online?
A13. Regarding ceramic capacitor capacity, at the earnings conference held on April 30, we said we planned to increase production capacity by around 15% from the fourth quarter of the previous fiscal year through the third quarter of the current fiscal year. We ramped up capacity by about half that, 7% to 8%, in the first quarter. This was not the result of new investment, but of increased capacity utilization resulting from the reconfiguration of facilities, as we said before. Regarding the remaining 7% to 8%, we are making investments in new capacity now, which we expect to lift our production capacity by the end of the third quarter to around 15% more than at the end of the previous fiscal year.
Q14. I have a question about the impact of structural reforms. The ratio of selling, general and administrative (SG&A) expenses to sales in the first quarter was 16.6%. This was quite a drop from the level in the previous fiscal year. Actually, it represented a quarterly change of around \37.0 billion. Do you expect to maintain this level of SG&A expenses? Can you maintain a ratio of between 16% and 17%? What concrete benefits have you already seen from completed reforms?

My second question is about ceramic capacitors. Once production capacity has been raised due to the new investments you are making now, how do you see fixed expenses changing from the third quarter? Would I be correct in assuming that fixed expenses will increase because depreciation expenses will rise in line with the new investments? Or do you expect the ratio of fixed expenses to decrease due to higher potential production capacity resulting from investments with a high return on investment?
A14. The SG&A expenses ratio in the first quarter was 16.6%, which was largely in line with our initial plan of approximately 17%. We are now trying to lower the ratio to around 16%. One of the reasons for the decline in the proportion of SG&A expenses in the first quarter was the closing and integration of bases in Japan and overseas as part of structural reforms up to now. Because of this and revisions to our systems which have improved efficiency, we have kept the ratio under 17%.

Regarding your question about fixed expenses in the ceramic capacitors business, basically as we said before, fixed expenses will increase in absolute terms, but should decline as a percentage of sales. Regarding the improvement as a whole, we expect the rate of variable expenses to fixed expenses would be about 2 to 1.
Q15. Assuming total costs decline 5 percentage points, would the same 2-to-1 split between variable expenses and fixed expenses apply?
A15. Yes.